Breaking Down Profit: How to Strengthen Your Bottom Line

Profit is one of the most critical numbers in any business, yet many business owners overlook its true meaning and impact. Having a clear understanding of how profit works can make all the difference in achieving financial success.

In business, there are two key types of profit: Gross Profit and Net Profit. Understanding the difference between them and knowing how to manage them effectively can be the key to financial success.

What is Gross Profit?

Gross profit is the difference between your revenue (or sales) and your cost of goods. Simply put, it's what remains after you subtract the direct costs of producing your goods or services.

For example, if you're a florist, your sales come from selling flowers. The cost of purchasing those flowers and other directly related expenses (such as wrapping materials) make up your cost of goods. Once you subtract these costs from your sales, you are left with gross profit.

What is Net Profit?

Under gross profit comes all your expenses—the costs that your business incurs regardless of whether you make a sale. These include rent, electricity, insurance, and other operating expenses. Once you subtract these expenses from your gross profit, you get your net profit—the amount that ultimately determines what you take home.

Every Line in Your Profit & Loss Statement is a Lever

Every item in your profit and loss statement represents a lever you can adjust to improve profitability. For example, let’s take electricity costs. If your electricity is part of your expenses, consider what can be turned off when not in use. Can you reassess your insurance policies to find better rates? When was the last time you reviewed your supplier agreements?

Why Profit Matters

Profit is the reason we do business. While profit and cash flow are not the same thing, they are closely related. Without profit, sooner or later, a business will run out of cash. That’s why understanding and managing your gross profit and net profit is essential for long-term success.

Take the time to review your numbers, identify areas where you can optimise costs, and ensure your business remains profitable. After all, at the end of the day, profit is what keeps your business thriving.